What College Graduates Really Need: A Job

Rachel Sheffield /
May 24, 2012

Today, the Senate is once again slated to take up the issue of college loan interest rates. President Obama has made this issue a big deal, touring college campuses to herald the absolute necessity of keeping student loan rates artificially low instead of letting what was supposed to be a temporary reduction expire.

In reality, the debate around student loan interest rates is a distraction from what really troubles new college grads: an anemic economy that is hindering students’ ability to find jobs and reach their earning potential. As AEI scholar Andrew Biggs wrote in the Wall Street Journal earlier this month:

Lower payments on college loans after graduation won’t come close to repairing the long-term economic damage that new graduates will suffer as a result of entering the workforce during a downturn.…

Lisa Kahn of the Yale School of Management found…that a one percentage point increase in the national unemployment rate correlated with wage losses of 6% to 7% per year for new college graduates. Recovery is excruciatingly slow: Even 15 years following graduation, their pay was 2.5% below normal.”

Biggs notes that, assuming “unemployment today is one percentage point higher than it could have been given more effective policies—such as a stimulus that actually stimulated, and spending and entitlement reforms to generate confidence in the economy—today’s new college graduates on average will lose around $40,000 in inflation-adjusted income over the next 15 years. That money wouldn’t simply have helped graduates meet their loan payments; it’s more than enough to repay the average college graduate’s entire $25,000 loan balance.”

Taxpayers, most of whom are not college graduates (the unemployment rate for high school graduates with no college education: 7.9 percent), will pay $6 billion a year to make it slightly easier for some fortunate students to acquire college degrees (the unemployment rate for college graduates: 4 percent).

As he adds, this will be $6 billion the government will “pretend to ‘pay for’…while borrowing $1 trillion this year.”

Continuing to increase federal subsidies for higher education (which includes subsidizing interest rates) while further burdening taxpayers will not mitigate ever-increasing college costs. In fact, looking to government to pop the higher ed bubble is a highly unlikely solution.

Dramatic reductions in college costs will come through innovations in the market, including the game-changing potential of online learning. Yale, Stanford, and MIT are already moving toward greater accessibility to online courses that are more cost efficient.

It’s a transformation that has the potential to save students far more than the paltry $7 per month that the Obama Administration has promised recent grads.